The Best and Worst Times To Invest

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The Best and Worst Times To Invest: Popular Delusions

By Dr. Steve Sjuggerud, Chairman, Investment U
Monday, February 3, 2003: Issue #210

“More than anything else, the stock market tracks [with] the U.S. economy and the earnings power of U.S. companies.” – Quote from an article in the mainstream financial press last week.

You probably believe the above quote is true. Your neighbor definitely believes that it’s true. And the commentators on CNBC definitely believe it’s true. (”If we could only get the economy going, THEN the stock market would rise,” they tell us)

Unfortunately, it is ABSOLUTELY FALSE. So, instead of following the herd, let’s take a look at the reality of the situationthe best and worst time to invest.

The Worst Time To Invest

The truth is, if you want to make a ton of money in stocks, the worst time to invest is when the U.S. economy looks good, corporate profits look good, and consumers are happy. You simply don’t want to buy when these factors convergeyou’ll never make any money. You WANT to buy when the economy looks bad, corporate earnings look bad, and consumers are dejected. Let me explain

Sure it sounds sensible that we need the economy to do well and corporate earnings to rise for the stock market to go up. The thing is, the numbers prove that the exact opposite is the case (as I’ll show). And this hits on one of the big problems with mainstream journalists. They’re not finance people. They don’t do math. And as usual, their “good-intentioned” advice is quite likely going to obliterate the wealth of a large number of investors.

Mike Palmer, a colleague of mine, sent me the quote at the top of the page and suggested that I explain what’s wrong with it to you. I told him that I wouldn’t want to do that – by taking on that writer I’d feel like I was tackling a pre-schooler. Then another colleague jumped in, suggesting that I don’t name the offending publication, and that it would be a great service to readers to show why the quote above is false. So here goes

I don’t bother much with the gossip. I go to the numbers.

Let’s look at the numbers:

Since 1960, when the economy is on fire (when real GDP growth was above 6%) stocks have lost an average of -4.6% a year. On the other hand, when the economy is in the dumps (shrinking at -2% a year or worse), stocks have gained an average of 30.8% a year. The numbers show exactly the opposite of what this journalist reported.

Now let’s look at earnings It’s the same story. When corporate earnings growth is on fire (growing at 20%+ a year), stocks only gain a tiny 0.3% a year. However, when companies are going down in flames (when earnings are shrinking between -10% and -25% annually), the stock market rises 28.6% a year! (Data from 1924 to 2001.) Yet again, the numbers show exactly the opposite of the popular wisdom.

Let’s look at the quote again: “More than anything else, the stock market tracks [with] the U.S. economy and the earnings power of U.S. companies.” Yes. The numbers show it. It is completely wrong. It is shoddy journalism – and it’s what you hear every day.

Consumer confidence is another story we hear about every day. “Consumer confidence is down, therefore stocks are down,” they’ll say, or words to that effect. Again I’ve done the math. And I’ve found that WHEN CONSUMER CONFIDENCE IS HIGH, YOU DON’T MAKE MUCH IN STOCKS. AND WHEN CONSUMERS HAVE NO CONFIDENCE AT ALL, YOU MAKE A MINT IN STOCKS.

Yes, what I’m saying is exactly the opposite of what gets reported every day. Yet I’m just reporting what the numbers tell me The index I use for this is the University of Michigan Consumer Expectations Index, a component of the Consumer Confidence Index. Fortunately for us number crunchers, the data goes back to 1960. I found that when consumer expectations are above 95 on the index, you only make 3.1% a year in stocks. When expectations are below 60, you make 24.5% a year. The Consumer Expectations Index is currently at 80.8.

Want to make a ton of money in stocks? Then DON’T buy when the economy looks good, corporate profits look good, and consumers are happy. You’ll never make any money, as it’s the worst time to invest.

The Best Time To Invest

Buy when the economy looks bad, corporate profits look bad, and consumers are dejected. This is the best time to investyou’re much more likely to make a mint. The reason for this is simple: WHEN IT LOOKS REALLY BAD, THERE’S PLENTY OF ROOM ON THE UPSIDE. AND WHEN IT FEELS REALLY GOOD, THERE’S PLENTY OF ROOM ON THE DOWNSIDE.

Right now, economists project GDP growth of 2.5% for 2003. Right now, stock market analysts project earnings growth of 16% in 2003. And right now (based on the Consumer Expectations Index), consumers are neither giddy nor downtrodden. While this may bode well for the American people and American business, based on the numbers I’ve shown you, now is not the time to make a mint in American stocks.

Good investing,

Steve

Today’s IU Crib Sheet

The idea that “when it feels really good, there’s plenty of room on the downside” brings to mind Rule Number 40 from the “Timeless Rules of Investing” we did a few months back (IUEL #176). That rule states: “Bear markets begin in good times. Bull markets begin in bad times.” If you haven’t re-read the 50 Timeless Rules of Investing in a while, I would encourage you to visit the archives and take a look.